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The Deficit Matters

In this installment of Trade and the Economy Watch, Scott M. Delman and Eric Wasserstrom discuss the big economic issues that last Friday’s debate failed to address. Go to Mr. Delman’s post.

Eric Wasserstrom is a managing director at a New York-based hedge fund and previously was an equity analyst for a global investment bank focusing on consumer lending. (Full biography.)

Last week’s debate between John McCain and Barack Obama focused on foreign policy issues, but it began with a discussion of the economy and the pending federal bailout for our country’s banks. The question that moderator Jim Lehrer didn’t ask, however, was the one that links these two areas: Does our current fiscal policy influence our national security?

The answer is a resounding yes. The lack of fiscal discipline over the last eight years has seriously harmed our national security. And the reason is simple: our stance as a debtor nation undermines our diplomatic strength.

On Monday, the House of Representatives failed to pass the bailout bill, but ultimately Congress will need to enact something that is similar. As I highlighted in my last post, the cost of this bailout package will double our nation’s deficit to more than 6 percent of gross domestic product, exceeding the previous high set in 1983. If additional government action is still needed — and it probably will be — the total deficit over the next year could be the highest seen since the period immediately after World War II.

So how will this deficit be financed? Mostly with the issuance of additional debt from the Treasury. Issuing government debt has been the cash lifeline to bridge the Bush administration’s combination of tax cuts, ballooning domestic spending and open-ended spending on the war in Iraq. Much of the buying of incremental American debt has come from foreign governments, particularly China and Middle Eastern nations.

This is not surprising. These economies benefit from a huge influx of dollars every year, as America transfers its wealth to pay for manufactured goods (China) or petroleum (the Middle East), and these nations recycle those dollars into investments in United States debt, primarily American government obligations.

But this strategy has a political angle, as well. Since our nation is now dependent on China to buy the debt that finances our country, our diplomatic authority when confronting China on critical issues is limited. These issues range from China’s support of North Korea’s and other nations’ nuclear ambitions, to its human rights record and its stance on Taiwan. At a time when our nation is financially dependent on China, can we really expect Beijing to take our diplomacy seriously? This problem underscores the short-sightedness of Dick Cheney’s now famous statement that “deficits don’t matter.”

The bailout package is an unfortunate necessity. But the real problem the next administration faces — getting our deficit under control — is a serious one, in no small part because its implications have deep consequences for our national security.

The democrats like to highlight the idea that the Clinton Administration balanced the budget and had projected budget surpluses as far as the eye can see. As a matter of fact, Speaker Pelosi was pounding on that assumption in her latest debacle a couple of days ago. I’ve actually heard Sen. Obama say that the 10 trillion debt that we now how is all George Bush’s fault and that there was no debt when Clinton left office. This is one of the main reasons that I will change party ID after this election. This kind of thinking is crazy. Unless you believe it, how could you lie like this. If you do believe it, you have no business being an elected representative in the fed gov. First of all, a budget is just that. Its the amount of tax money that is coming in deducted from the amount of government expense money going out. The plus or minus is whats left. If it is a minus then the Treasury asks the fed res to borrow it from whomever(China perhaps). Second, the dot com bust happened and one of the worst recession in modern times was just beginning when Clinton left office. Not only that but 911 happened. The fed dropped the interest rates to rock bottom and left it there for years. This is why we have the mortgage crisis. To try to blame all this mess on Bush is pure folly. Bush couldn’t or wouldn’t cut fiscal spending. That was his mistake. The American people deserve a better understanding.

Obama’s plan was originally estimated to add $4 Billion to the deficit; with the weakening economy, and his apparent unwillingness to spend political capital on spending cuts (witness his evasiveness in the face of Lehrer’s questioning), the Demo’s will stuff Federal spending and swell the deficit dramatically.

The only real difference between the parties at this point is who gets the pork. We’ll replace Bush43’s Blackwater and KBR with Obama’s Archer Daniel Midlands and Exelon.

The bailout, whether $700 billion or $1 trillion is a one time event. The last 7 years of deficits have taken the debt from $3.3 trillion to $5.5 trillion. With balanced budgets for the past 7 years the debt would be $3.3 trillion and the bailout would not be such a large event. Balanced budgets, either by low taxes and low government spending (GOP) or by high taxes and high government spending (Dems) are required, not the low taxes and high government spending that has been in place over the past 7 years. Both McCain and Obama have their priorities but neither is talking about balancing the budget.

At last! Someone has written what I have been saying for years! It is true that our country can handle a tremendous amount of debt, because our economy grows, inflationary pressures are bowed to, and the raw number of the debt becomes less and less important. Individuals experience the same thing with their mortgage payments. What was a stretch to make in the first five years becomes comfortable in the next ten and seems negligible in the final fifteen. But that is true only if the amount of the debt payment remains the same.

The Republicans very well may lose the next presidential election, but they will retain their choke hold on effective government. The huge deficits and fiscal irresponsibility created during the years beginning with Ronald Reagan and epitomized by George W. Bush will prevent government from responding effectively to critical foreign and domestic needs.

We need to stop electing people to run our government who do not believe in government.

The alleged connection between Republicas and low government spending is absolutely spurious. Even allowing for Iraq war spending, federal government spending has grown very fast under Bush. He hasn’t even submitted a balanced budget, let alone a balanced budge that could have passed even in the six years the Republicans ran both houses of Congress.

McCain’s math is no better. Ending earmarks won’t address more than 5% of the deficit, or less than 1% of total federal spending. It’s a joke.

Taxes must go up to support federal obligations for defense, tax payments on the debt, Social Security commitments to the aged, and medical care for the old and the poor. It’s a question of how much taxes go up and on whom.

Voters made it clear in 2000 and 2004 that they had no concern for the deficit. President Clinton’s remarkable effort to raise taxes but NOT raise spending to close the Reagan-Bush gap took real political leadership and courage – and fell flat at the polling booth.

I believe the hard right will discover to their dismay that by embracing deficits, any new tax increases will go to increased spending, leaving the same large deficit and new programs that will never go away. Had the hard right embraced balanced-budget politics in 2001-2008, they could have set the stage for smaller government.

And when the time does come to pay off the debt, voters may look at who benefited the most from the cuts that caused them: the super-rich. The Republican embrace of massive deficits since 1980 is one of the severe failures of our generation.

Someone correct me but the $700 Billion I keep seeing is an authorization to bid on bank securities. These are securities which are currently worthless since there’s no bid. The reason there’s no bid is because of a complete breakdown of trust in the financial markets. It seems to me that all that is needed to fix this is to restore trust by placing a low bid on these securities. The government doesn’t even need to spend a cent on this “bailout”. It just has to show it is willing. Someone has to take the lead.

The greater problem of fiscal irresponsibility (deficits in both the federal budget and in our foreign trade) is there but is an entirely different problem. The solution to this problem will involve tax increases, spending cuts and energy independence.

To Cliff Jones (#1): The dot.com bust was not the the failure of government. No one can stop me from paying $100/share for a worthless company.

But the S&L failure in the 1980’s and the failure to regulate derivatives and hedge funds is a distinctive Republican feature.

Clinton DOES deserve credit for promoting tax increases (never popular) and NOT increasing size of government (increasing size of gov’t is always popular, if the money is borrowed.) Bush did the opposite and this is a simple mathematical fact that political posturing can not hide.

Yesterday, a high school class of seniors asked me why our country is in such a financial mess. (I had just finished 90 minutes with them on debt management, opportunity costs, credit cards, compound interest and procrastination.)

I answered by saying as my old calculus professor used to say “funny things happen when you approach the limit.” I said we as a Nation are/have approached the limit. As a people, we ask our politicians and government for more and more; they want to be reelected and they mortgage the future. Is the opportunity cost for higher defense expenditures, the foregone opportunity for expanded health care? Is the OC for more NASA funding less funding for the arts? In reality our leaders cave in to special interests and we fund everything. Hence, deficit spending.

I then asked the class, could your family expect to prosper if it continually borrowed money and lived beyond their means. Almost all heads shook NO. To which I asked, why should we expect our government to not suffer a similar fate? The connection was made. I said the deficit won’t matter much if our currency loses its intrinsic value in the global economy.

It surprised me the class was concerned about the bail out issue when I normally expect them to be focused on their circle of friends, next party, SAT and ACT exams. We’re surely leaving them a mess!

Cliff Jones — I agree with you that it’s not entirely the fault of Bush (though numerous other things are). The Democrats spending habits are just as bad as the Republicans. However, if you want to blame someone for the spiraling deficits, you should look to the conservative camp since Reagan, for that is when debts exploded. (Even FDR balanced the budget!).

Supply-side economics wants to have its cake and eat it to. Ever since Reagan promised us we could have massive spending, military interventionism around the world to secure our profligate lifestyles and tax cuts to boot(!) deficits have exploded. Name one republican president who has CUT spending! I’ll give you a cookie!

Also, once we left the gold standard in 1971 under Nixon (to finance bombing people in Vietnam) we have not really recorded a surplus since the gold standard kept government spending honest. But republicans (and democrats) with their military missions will never submit to fiscal restraint, espeically the last few repubs since Reagan, cowboys all, and debt-mongers.

The repubs may not deserve all the blame but they sure do deserve a lot of it.

OK, so we need to bail out Wall Street or Main Street or whoever to “save our economy” because lenders took on too much risk, consumers bought more than they could afford, credit card companies competed for business among consumers who had already reached maximum limits on other cards, etc. Meanwhile the “solution” to this problem is for government to live further beyond its means and accrue more debt? Isn’t this an indication that exactly the type of behavior from individuals that got us into the problem is now being pursued by government as a “solution”?

Leadership, to me, would look like starting with acknowledgement of the problems we face, then asking us to use discipline and sacrifice to solve them together. Politics has devolved into the art of offending the least number of voters while creating the most believable lies about your opponent. Political leadership has become an oxymoron.

The current deficit is a perfect mirror of our values and beliefs; after all, how many individuals are living on deficit spending through credit cards, home equity lines, etc.? And how much of this deficit spending addresses true needs versus special interests or wants? The sooner we realize that we are interdependent and need to cooperate with one another to thrive instead of living as if we need to take away from one another to thrive, the better we will all be. Finally, the sooner we pass real campaign finance reform so that politicians are not caught between serving funders; i.e., corporations, whose only moral imperative, by law, is to make a profit, versus people and the planet, the sooner politicians will stop passing bills that harm all of us–to wit, repeal of the Glass-Steagall Act, signed by Clinton, but sponsored by Republicans. It is possible to serve multiple needs, but not when they are pitted against one another – and the way the system is set up now, that is exactly what happens.

I’m a Canadian. Do you know that 50% of the US budget goes to the military ? Just get out of Iraq, cut the military expenses and there won’t be any deficit in the US. It’s a frightening idea for many Americans but this is what is needed if you want to live in a safe country. Because poverty in all the country won’t bring security inside.
I wish to all my American friends peace and wisdom.

We need much higher marginal tax rate which among other benefical affects might change the culture of greed that lead to bad decisions. Here are some facts on higher taxes.

1. During the period 1946 – 1973 taxes were much higher. Marginal rates were 70%; they were 93% under Eisenhower. The economy was better than what we now have. For example, median wages went up 50% during this period, and only 25% since then. Also I recently saw a graph of the national debt from 1946 to the present. It started high, went straight down until 1973, flatten out and then made a sharp turn and went straight up except for a wiggle during the Clinton administration. CEO’s earned 50 times what their workers earned; it is 500 times today.
2. We are now told that taxes were too high during the Clinton administration, and it would be terrible to go back to them, but the economy was better then than what we have now. For example, 22.5 million jobs were created during Clinton’s terms while Bush created under 5 million.
3. In you look at other countries, you will see that that many have much higher taxes, but also higher growth rate. For example, our total tax rate is 26.1% while Sweden has a total tax rate of 50.2%, the average per capita growth in the GDP 1995 – 2005 was 2.1% for the US and 2.6% for Sweden. Spain had a 50% higher tax rate and 50% higher growth. Japan, on the other hand, had a lower tax rate and its growth was less than half of our growth.

#18.
I heard him say it within the last month. I can’t remember the event right off hand. As a matter of fact I commented on one of the blogs in this paper.
#15. I agree with you that the republicans share a lot part of the blame.
#12. I didn’t say that the dot com bust was a government failure. I’m just saying that it happened and that trillions of dollars was lost on Wall Street which pushed the recession along.
Bush and Greenspan were not on the same page. Greenspan left the interest rates too low for too long. Bush and the Congress made the grandfather tax cuts to also deal with the recession. The war in Iraq and Afghanistan made it almost impossible to rein in government spending. On top of that, scam artists and others took advantage of the low interest rates in the mortgage industry. This was aided by the lax policies and corruption of CEOs of Freddie and Frannie.

Most of the above commentators have blamed one of the political parties, or perhaps both of them, for the fiscal mess that has been building since the 1980’s. When supply side economics was first posited by Reagan only George Bush spoke up calling it “voodoo economics” simply because plain arithmetic indicated it was unworkable. Since then the whole nation has simply failed to do one basic thing, that is, reconcile the things we want government to accomplish with the tax effort necessary to do them. In Western Europe folks opted for a comprehensive welfare state and a world class infrastructure. This involved a tax effort approaching or exceeding 50% of GNP and unilateral disarmament. We, on the other had have settled for a tax effort of approximately 33% of GNP, massive armaments and military commitments, a porous social safety net, an insufficiently funded infrastructure and crumbling inner cities. Did we choose this state of affairs in a rational, deliberate manner? I think that we have stumbled into it more-or-less blindly because we have never thought our policy options through and our political parties aren’t equipped to present us with clear priorities or lead us in an intellegent direction. Unfortunately our citizens are too confused and ignorant to recogize it and demand that political candidates do the necessary math.

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Weekly pieces by the Op-Ed columnists Charles Blow and Ross Douthat, as well as regular posts from contributing writers like Thomas B. Edsall and Timothy Egan. This is also the place for opinionated political thinkers from all over the United States to make their arguments about everything connected to the 2012 election. Yes, everything: the candidates, the states, the caucuses, the issues, the rules, the controversies, the primaries, the ads, the electorate, the present, the past and even the future.